What If We're Wrong?
Making money in stocks is a lot easier when you're right. But being right about things involving the future is a lot like predicting, and countless studies have shown that experts and other humans are lousy at predicting.
That doesn't mean you should stop thinking about how the future will unfold, or which companies will do best in the years ahead. It does mean you should expect to be wrong sometimes — and prepared to be proved wrong without sacrificing a lot of return.
For our stock selections, the Quadrix rating system generally does a good job of pointing out our errors. If the fundamentals of one of our recommendations deteriorate — or if its share price outruns its fundamentals — a falling Overall score may indicate something is amiss.
For our market-timing advice, we strive for humility, avoiding all-or-nothing bets and listening to the market with an open mind. We're not rooting for the market to decline because the Dow Theory is in the bearish camp, and we're not ignoring bullish headlines because they don't fit a bearish view.
The truth is we don't know which way the market is headed. We use a system, the Dow Theory, with a more than 100-year track record of mostly keeping investors on the right side of the primary trend. But the system is premised on the idea that the majority money opinion is usually right, so a good Dow Theorist is always looking for a potential change in the primary trend.
For a return to the bullish camp, the first requirement is a significant advance in the Dow Industrials and Dow Transports. In our view, the rebounds since Aug. 25 have satisfied this requirement.
On the market's next decline, the Aug. 25 lows of 15,666.44 in the Industrials and 7,466.97 in the Transports will be crucial. If at least one average avoids a breakdown to new lows, then both averages rebound above the highs established in the current advance, the Dow Theory would return to the bullish camp.
Alternatively, if the Industrials and Transports advance without interruption and close above their respective all-time highs of 18,312.39 and 9,217.44, we'd conclude that the Aug. 20 bear-market signal was a mistake.
No matter which way the market goes, we're going to have too much in stocks or too much in cash. We're alright with that.
We don't provide market-timing advice to prove how smart we are. We try to strike the right balance based on our view of the primary trend and the opportunities available in individual stocks. For now, that means holding 28% to 30% of equity portfolios in a short-term bond fund.